Infinity Development Holdings (HKG:640) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Infinity Development Holdings (HKG:640) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Infinity Development Holdings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = HK$69m ÷ (HK$592m - HK$154m) (Based on the trailing twelve months to September 2020).

So, Infinity Development Holdings has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.5% it's much better.

Check out our latest analysis for Infinity Development Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Infinity Development Holdings' ROCE against it's prior returns. If you'd like to look at how Infinity Development Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Infinity Development Holdings' ROCE Trend?

Infinity Development Holdings' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 38% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

To bring it all together, Infinity Development Holdings has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 32% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Infinity Development Holdings you'll probably want to know about.

While Infinity Development Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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